Elliot Hentov, head of policy and research in the Official Institutions Group at State Street Global Advisors
In his first real electoral test since 2016, Donald Trump appears to be more beholden to historical norms that he might like to admit. The performance of his Republican party remained in line with past trends, suggesting that traditional polling continues to be useful in predicting US political outcomes. With a strong economy and a relatively unpopular president, the US electorate re-established its historical baseline, namely divided government.

While this virtually guarantees gridlock at the federal level, the likelihood of fewer policy surprises, more focus on domestic politics and greater importance of macro fundamentals means this election outcome should be positive for markets in the near term. Muted market reaction to the election suggested that a retake of the House by Democrats and continued Republican hold on the Senate were both priced in.

To understand the importance of yesterday’s voting, we need to look beyond the House races to the Senate, governor and referenda contests. In line with polls, the Republicans were able to expand their majority in the Senate, adding two or three seats net. Trump has already taken credit for securing the Senate victory, pointing out that most of his campaign rallies took place in states where Republicans ultimately won. However, this ignores the fact that these campaigns were largely in deeply red states where his approval rating hovers near or above 50%. In other words, the Senate result does not contradict the House result.

More importantly, the gubernatorial races suggest that the political current has shifted away from Trump. The Democrats gained seven governorships net, restoring a more balanced distribution of 23-27 governorships across the country. This matters for the redistricting ahead of the 2020 elections and the mobilization of local voters. In addition, several ballot measures were passed that could further boost turnout in key swing states. For example, Florida restored voting rights to roughly 1.5 million former felons, and Michigan approved gerrymandering reforms and same-day voter registration.

Thomas Costberg, senior US economist at Pictet Wealth Management
The prospect for large-scale infrastructure spending, while an area of possible political convergence, remains uncertain, as there could be disagreement over federal funding. Likewise, the road ahead for tech regulation remains uncertain, in spite of the enthusiasm of some newly elected Democrats for controlling big tech.

The Democrats could give tacit agreement to Trump’s tough trade negotiation tactics, in particular towards China. We still believe there will be further tariffs on Chinese imports, even though bilateral dialogue should continue. Of particular note in the near term will be the G20 meeting in Buenos Aires at the end of this month.

Overall, we remain constructive on the US economic outlook as domestic drivers, particularly business investment, do not look like they’re losing steam. We still see GDP growth of 3 per cent in 2018 as a whole, and north of 3 per cent in 4Q. As a result, we are also maintaining our scenario of one additional Federal Reserve rate increase by December and three further ones next year.

Capital Economics
With the mid-terms in the rear view mirror, the focus in the Treasury market already seems to have returned to what the Fed will do next. Given the outlook for the US economy, we think that Treasury yields will fall back sharply by the end of next year as the Fed calls time on its tightening cycle, regardless of how President Trump deals with a newly-divided Congress.

As the results of the mid-terms trickled in earlier this week, Treasury yields briefly jumped as some early positive signs for the Republicans indicated that their chances of holding the House of Representatives were much better than previously thought. Yields then fell back, as this early momentum faded and it became clear that the Democrats would take the House. These movements presumably reflected a view that another round of fiscal stimulus – which would add to worries about the size of the budget deficit and increase the pressure on the Fed to raise rates – would be much less likely under a Democrat- than a Republican-controlled House.

Since then, though, it is striking that Treasury yields have picked up again across the curve, in spite of the Democrats’ success in the House. Indeed, they are actually higher now than they were just before the mid-terms.

Dylan Cheang, strategist at DBS
The Democratic Party’s control of the House of Representatives lays the groundwork for more congressional gridlock over the next two years. Trump needs to seek compromises from both sides of the aisle to push his economic agenda through – a tall order. Tax reform and other infrastructure programs will face stiffer resistance.

While heightened gridlock will weigh on fiscal initiatives, it will also slow down the rise of the dollar and rates. This is positive for risk assets. The conclusion of the mid-terms removes a major overhang for risk assets; markets will now focus their attention on the G-20 summit and the US-China trade crisis. The Democrats have regained control of the House of Representatives, following a mid-term election that was widely deemed as a referendum on Donald Trump’s presidency. The Democratic Party, however, lost ground in the Senate as the Republicans increased their majority.

The apparent success of the Democrats in capturing congressional suburban states, and its seeming failure in connecting with white, rural, and blue-collar workers in the Senate races, highlights the US’s widening rural-urban divide. More importantly, the latest election outcome suggests that partisan conflicts will become a mainstay in the US over the next two years.

Attention will now turn to the US presidential election in 2020. Trump’s prospects of getting re-elected hinge heavily on how successfully he can navigate the altered political landscape, and ensure the continuation of a healthy domestic economic expansion.